Selling a property into your super fund

SUMMARY: Are you considering selling property to get money into super? Here’s what you need to consider.

It is rare that no-one has any regret about a life of successful investing.

In hindsight, there will always have been missed opportunities, or the one that got away. There will also have been regrets over not selling some assets soon enough, before the falls.

And, of course, with most people, there will be structural issues that could only have been dealt with at inception – such as the ownership of the asset either in personal names, companies, trusts or superannuation.

And property investors who have done well are no exception. Usually, when approaching retirement, the thought enters their mind: “Mmm, I wish I’d done more in super”.

The guilt is easy to understand. When approaching retirement, the capital gains might have been great, but unless the net rental income will be sufficient to provide for all expenditure needs, there will generally be a need to sell assets, or reduce leverage to improve income.

“Do I sell before retirement? Do I sell after? Can I get the money into super?”

One option usually comes with a higher CGT bill, but better tax-free income in retirement (selling before 65), while the other option might save a bit of CGT, but will leave most of your money sitting outside super, where it will be fully taxed.

The answer will depend on your personal circumstances, including your age, the amount of income you require, the amount of CGT to be paid and your personal risk tolerance. But here is what you need to begin thinking about.

Selling before or after retirement

If you sell an investment property for a sizeable capital gain in retirement, the amount of CGT likely to be paid should be lower than if you were still employed.

Let’s assume a profit of $300,000 has been made. This is reduced to $150,000 after the CGT discount.

If you were earning $100,000 while employed, then the $150,000 capital gain on the property gets added to your assessable income. This would leave you with paying 37% CGT on the first $80,000 of the capital gain, and then 45% on the last $70,000 of the gain. Then another 2% for the Medicare Levy.

This would lead to a total CGT bill of approximately $64,100.

However, if you sold after you had retired and this was your only source of income for the year, you would benefit from the tax-free threshold of $18,200, plus the lower tax rates applicable up to $80,000.

This would lead to a CGT bill of approximately $46,132 (including Medicare).

And if you were selling down a property portfolio over a number of years, this a saving of approximately $18,000 a property might be worthwhile.

Getting the proceeds into super – under 65

Timing the sale might be more important from the perspective of whether or not you can get the money into super.

Paying the extra $18,000 in CGT for selling the property early might be worth it, if it means you can get the money into super, where it will be able to earn in the future tax free.

If you retire early (before 65), then you should be able to get a sizeable amout of money into super. You would certainly maximise your concessional contributions, up to your $25,000 limit, which would have the impact of reducing your taxable income for the year.

But the real benefit would come in the form of being able to make non-concessional contributions (NCCs). Eligible contributors can put in up to $100,000 a year in NCCs.

If you’re under 65, then you might be able to make use of the three-year pull-forward provisions, allowing you to get $300,000 into super in a single hit. And this might be useful for each member of a couple (total $600,000).

However, if the gain is big enough enough and you are 63 or younger, then you might consider putting in $100,000 in the current financial year, and then another $300,000 in the following financial year.

The pull-forward provisions don’t kick in until they are “tripped”, which is when someone puts in more than $100,000 of NCCs in a given year.

If you put in $150,000 of NCCs in a year (say in FY19), then you have tripped the pull-forward rules. You will be restricted to putting in a total of $150,000 combined for FY20 and FY21.

However, if you only put in $100,000 in FY19, then you have not tripped the pull-forward provisions. You would then be able to put in $300,000 in FY20, which would have used up your contribution limits for FY21 and FY22. There is $400,000, possible times two for a partner who is also eligible.

If considering making NCCs and you’re over 60, there are a few other things that you might need to be aware of, including your Total Superannuation Balance (TSB). If your TSB is already over $1.4m, then you will face some restrictions as to using the pull-forward rules (for more details, see 2/3/2017). See advice from a qualified professional.

And those over 65

For older Australians, while you have most likely paid less tax by selling after retirement, getting money into super is the problem.

There are fewer restrictions about getting money into super before turning 65. But being able to make contributions after turning 65 requires the member to meet the “work test”.

The work test requires a member to have worked a total of 40 hours or more in a single 30-day period during a financial year.

This qualifies the member to make contributions for that financial year, both CCs and NCCs. However, a member over 65 cannot use the pull-forward provisions, so are restricted to making a single $100,000 contribution, unless they also meet the work test the following year.

Members can only make these member contributions up to the age of 75.

(From 1 July 2019, it is proposed that members will be exempt from meeting the work test for the financial year following the year they retire. But this is not yet law.)

Even more personal issues

Importantly, before any of the rules around contributions are considered, there is work to be done on determining what it is that you are trying to achieve by the sale of the property assets.

Is it a certain level of income in retirement? Is it deleveraging your asset base? Is it to change the mix of the portfolio assets?

Determining your required income in retirement is going to take a spreadsheet and some budgeting work to find out what you’ll need/want in retirement. The decision on whether to deleverage is going to require an understanding of how much debt needs to be paid down and what impact it will have on net income. And if you’ve been a property investor all of your life, then what assets are you going to replace the property with inside, or outside super.

This needs to be done before any decision on a sale is taken. It will take hours. And might require the assistance of a trusted professional adviser.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.